Reading Cisco’s signals

Contact: Brenon Daly

As a bellwether for the tech industry, Cisco Systems laid out a fairly bearish outlook for Wall Street in its report on fiscal first-quarter results. The projections of lower-than-expected revenue at the networking giant trimmed some $20bn from its market value Thursday, and helped dragged down the Nasdaq, which has tacked on 6% over the past month. But from our perspective, Cisco is not just a key indicator for the equity market – it’s also a key indicator for the M&A market.

Looking more closely at the company’s fiscal Q1 report, we can’t help but be struck by Cisco’s paltry M&A spending. During the August-October period, the company handed over a total of just $69m (net of cash at acquired companies) for its purchases of ExtendMedia and Arch Rock. (Specific terms on both deals weren’t disclosed.)

While that may sound like a lot of money, it’s pocket change to Cisco, which generated $1.7bn in cash flow from operations in the quarter. Or more dramatically, consider this: during Q1, Cisco spent $2.5bn on share repurchases. That means it spent more than 35 times more on its own equity than on the equity of other companies.

Not that Cisco has been alone in staying out of the big-ticket M&A market recently. We noted that October (the final month of Cisco’s fiscal first quarter) was the first month of 2010 that a tech company didn’t announce a single transaction valued at more than $1bn. Obviously, that streak was broken last week, when Oracle said it was spending $1bn for Art Technology Group. Still, it was only Oracle’s second significant acquisition of the past 18 months.